The GERM Report

-Russia and Saudi Arabia kiss and make up

-Estimates put the US unemployment rate near 25%

A Saudi-Russian kiss-and-makeup moment gave support to crude oil prices early Thursday, even as the IEA warned of heightened volatility ahead. The early 2020 price war between two overseers of OPEC+ left a devastating impact on the market after demand destruction from the coronavirus set in. Now, the two giants are making amends as the consequences of war hit both adversaries hard. The price of oil has enjoyed a resounding recovery so far in May, though the chorus of voices warning about volatility ahead continues to sing. Meanwhile, if all the Americans laid off from their jobs were counted in official figures, the US unemployment rate would suggest about 1 in 4 people are without work in the world’s largest economy.

It’s been a relatively quiet week so far for Brent crude oil, with day-to-day volatility masking a leveling around $30 per barrel. The global benchmark was trading up some 2.7% as of 8 a.m. ET to trade at $29.98 per barrel.

Russian reluctance to embrace formal cuts as demand destruction set in early this year pushed the price of oil into the upper teens after Saudi Arabia responded with a full press on market share. The price war left casualties on both sides, with Riyadh adopting stricter austerity measures and Russia’s Central Bank describing the quarantine economy as “quite serious.” Both sides managed to overcome their differences and agree to 9.7 million barrels per day in coordinated cuts. The Saudi government and its GCC allies agreed to additional cuts from June and on Thursday, Moscow and Riyadh agreed on further cooperation.

“Our two nations remain firmly committed to achieving the goal of market stability and expediting the rebalancing of the oil market,” a joint statement read.

Coordinated cuts come from historic highs, however. OPEC economists in their monthly market report for May put Russian crude oil production at 10.66 million bpd last month, up 54,000 bpd from March and 53,000 bpd higher year-on-year. Secondary sources reporting to OPEC put Saudi crude oil production in April at 11.5 million bpd, compared to an average of 9.78 million bpd last year. In its monthly market report, the International Energy Agency reported it would be the United States that emerged as the supplier with the largest reductions compared with last year. US output, coming largely from market-driven cuts, could be 2.8 million bpd lower than last year. That’s nearly 2 million bpd more than Saudi Arabian constraint, and could be interpreted as a sign of the collateral damage from the Saudi-Russian price war.

“So, oil production is reacting in a big way to market forces and economic activity is beginning a gradual-but-fragile recovery,” the IEA’s report read. “However, major uncertainties remain.”

Uncertainty is what drives market volatility, raising the risk premium. The risk prompted a warning US Commodity Futures Trading Commission. Without naming names, the CFTC warned that trading is a gamble and there are no sure things.

“You may sustain a total loss of the funds that you deposit with your broker to establish or maintain a position in the commodity futures market, and you may incur losses beyond these amounts,” the commission stated in a reminder.

Just as drastic times call for drastic measures, uncertain times can lead to uncertain outcomes. Even with state controls, there are no guarantees in this market climate.